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Transcript: press conference re balance of payments



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TREASURER

EMBARGO

TRANSCRIPT OF THE TREASURER, THE HON PAUL KEATING HP, PRESS CONFERENCE RE BALANCE OF PAYMENTS, 5 FEBRUARY 1991

E & Ο E - PROOF ONLY

T: Well, I'll give you a few introductory comments about the December balance of payments and then invite questions. I think the first thing I'd like to say is the number is higher than expected, but in terms of its components and particularly in endogenous imports, it's quite good. This is the lowest endogenous import number for the month, that's underlying imports for the month, we've had

really for about 13 months so the general impact of policy on imports which are obviously working. Imports are down by about 12 percent in seasonally adjusted terms for the month, for the six months they're down by 4.2 percent and I might add that for the month the month number includes of course an 8 percent depreciation of the exchange rate, so the volumes are quite good. In other words, if we've got a lower nominal import number with a change in exchange rate, it means there's a bigger

fall in the volumes than seems visible in the numbers. But the most important thing is for the year we've got the current account down and for the six months, as the release says, it's down by 28 percent for the six months ended December 1989. So imports are going OK, export volumes are going well, but export prices have come off.

If there's any news in this release today it is the

impact of those lower commodity prices which is belying the fact that export volumes have been quite good. So export volumes are OK, but as you know, I mean, those who've been here quite a long time know we're now living through three shifts in the terms of trade. A big fall in '85/6, the banana republic one and the big shoot up in the terms of trade in '87/8 and '89 and now a substantial

fall off. And it's that substantial fall off which is pulling the export numbers down, even though the volumes are really quite good. So, as you know, many of you have tried to make me responsible for imports and that's fine, but I'm certainly not responsible for export prices and

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so the things for which the Government is prepared to take responsibility, in terms of policy, imports. Imports are doing pretty well. I might also add that manufactured exports continued to show pretty strong growth. They're 13 percent higher in the six months to

December and they're 16 percent higher in December '90 over December '89. So manufactured exports which have been the focus of all sorts of people are going quite well. For the month, that's December over November, manufactured exports fell 13 percent but the reason for

that was that in December we had, you might, in November we had that very large component on exports from planes which were exported to Pakistan. You might recall that when you report it, we had a large component of exports

to Pakistan in aircraft. Well obviously that was an ... feature so the next month has to show a fall in

manufactured exports, but if you look at the manufactured exports over the year, they're 16 percent up on the same month a year earlier and 13 percent higher in the six months to December. I suppose I might leave my

introductory remarks there and invite questions.

J : When you talk about manufactured exports, do those figures suggest that the people who are calling for Government action to encourage a greater level of manufactured exports are premature in those calls and

that in fact policy is working to achieve them?

T: I don't think a lot of people understand the numbers are as good as they are. Manufactured exports are up about 100 percent over what they were in 1983/4 and they're rising now quite strongly every year. So, I mean, in my experience, whenever I say this to people they are

surprised to know that.

J: (inaudible)

T: Well, you've got - I think the best thing to look at is Page 9, the last line, second last line on Page 9,

endogenous, endogenous imports and if you look at that number 3073, it's the lowest number of any number in the last 13 months. So I think that's the critical one.

J: The total imports bill is the one that has to be paid

for, that's what's causing the foreign debt -T: I know, I realise that, but I mean, but again, we won't go on. I mean, we're talking about a structural change as well as a cyclical one. We won't go on importing as

we have this month. Qantas imported two Boeing 767s, one Boeing 747 and Australian Airlines imported one Boeing 737. You know, that's got to come to an end. It's the underlying features that matter.

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J : ... estimate, just looking at the graph at the beginning of the release, imports are trending upwards at a time when the economy moved in quite a sharp downturn and it's not what you'd be expecting based on your own strategy is

it?

T: No, but again wash out exogenous, this is a very large exogenous number, it's $400 odd million. I mean if you have a look at the real figure of a year ago, wait until I find it again, that is a seasonally adjusted, well,

let's have a look at the original ones on Page 7,

December 1989, 1310, that's for the current account in general, sorry, against December with 1069, but the seasonally adjusted numbers, the seasonally adjusted number is 1884 for the year to December 1989 against 1775

for this December, but that December didn't have $400 million worth of aircraft in it. So if you take $400 million out of the 1775, you've got in terms of a current account balance, that December '90 over December '89, a

substantial improvement and the same with the graph on the front in relation to imports. I mean, it's the whole exogenous/endogenous issue.

J : ... when they start bringing in the ...

T: Yes, but I mean they're going to be a long time. I mean, there would be a succession of Treasurers claiming the credit for those, they've got a 20 year life. You know what I mean? So we've got all the costs up front and,

you know, Qantas is now, some of those airlines are taking planes that they're not filling.

J: Treasurer, how do you ... economy does recover that you won't see a resurgence of these import figures?

T: Well, one can never be certain of anything in this world, but what we're hoping is that the continuing basically improvement of the economy, in terms of its capital stock, structure, etc, shift to exports away from domestic consumption, will keep powering the current account along.

Ji ... about what these figures mean for the debate about

whether extra assistance is needed for exports .. .

T: Manufactured exports are growing quite strongly, that's a fact of life, that's not a point of argument, that's a fact of life. They can always grow more strongly I

suppose as some would argue, but obviously this 30 percent improvement in the current account is coming from two things. It's coming from a better import competing performance, slower demand and more domestic products being exported. In other words, there is an exportable

surplus that there wasn't there when the economy, when demand was strong and we were consuming all of our

production domestically. A lot of that's now ... steel

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is a classic example. We were not only consuming all of BHP's products, but importing more steel. Now BHP's exporting steel are going quite strongly. So it's a matter of fighting the whole issue on those two fronts -

import competition and exports. Now we can always do better on both and I suppose that's the underlying point of any criticism about manufactured exports. But, again, building an export culture from the protection dependent

industry we had is a long term adjustment thing and the sort of numbers we've had are really quite strong.

J : So do you think that the sort of measures that have been talked about to possibly try to boost exports would be very much at the margin and not worth the trouble and the adverse . ..

T; The trouble is, Michelle, what measures. I mean the

advocates of these things are short on the measures, that's the problem you see. They say they want exports but they don't know what measures.

J: (inaudible)

T: No, anyone who's mentioned these things talks about export promotion but they're short on the measures and if you look at the study which Helen Hughes did in relation to export facilitation, that is export promotion, we provide more promotion per capita or per unit of product

than most countries.

J: Is there room to expand that or is there no room to

expand it?

T: Well now you're trying to delve into our little economic, little manufacturing industry cum economic statement aren't you, Michelle? I mean, good on you, but I don't know whether I can help you. You already know some of these things are associated with me on the tax side propositions, but again I like to do things which I think benefit the, if you like, the traded goods sector of the economy against the non traded goods sector of the economy, not distinguishing between exports and imports.

J: ... disadvantages Australian manufacturers, the

depreciation structure that we have -T: Well, I don't agree with that.

J: You don't?

T: No.

J: (inaudible)

T: That's not to say it's not capable of being changed. I mean, you know, we're now looking at a number of measures

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we've had under examination. One's already been

reported, that's the definition, a definition of depreciation which will give a company right to go to the courts and argue about something which they've never had before. But the removal of 53 depreciation came with a huge benefit, a cut in the corporate rate from 49 to 39 percent and again the acceleration was supporting long

life investments against short life investments.

J : ... the quality of the work that's been done so far on

the various measures ... on industry policy. Are you happy with this ...

T: Well, anything that comes from my Department is of its essence decent work. I couldn't be quite as

spontaneously or immediately generous on everybody else's Departments.

J : Mr Keating, if these figures are so good, do you think it's time for even more interest rate relief?

T: No, I don't think there's anything in these figures, Paul, that suggests that there's a cause for interest rate relief. We've now got bills at around 12 percent odd and cash about the same, the long term bond rate has now fallen to 11.4 from 14 and a bit at its peak a year or so ago. So there's a, I mean, the long term bond rate

is a rate which is fixed in the market without any

liquidity considerations being entered into or any manipulation of those by the Central Bank. So it's a judgment about long run rates and long run rates are down quite low. It's a long time since, I don't know how

long, but a long time since we've had a ten year bond rate of 11.4 percent.

J : Is there scope for more cuts in retail rates and mortgage rates within that existing progress?

T: Well, they'll have their impact, those cash reductions, will have their impact on the cost structure as some of these higher cost deposits migrate down to lower cost ones, but I have had at various times a better picture, a

better snap shot of those things. I mean, I've been asked this at times when housing rates were higher and business rates were higher and I had a much better snap shot then of the books of the various banks than I have today for instance. But my intuition in the matter would

say that there would still be some room yet for some modest further reduction in rates from earlier easings, from the earlier easings.

J : ... your Budget strategy this year is largely based on net export providing activity in the economy, you've talked today about the fact that we're seeing another decline in the terms of trade. Are you sticking to your

forecast about the contribution that exports are likely

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to make -T: I'm not sticking or not sticking with it. At the moment we've not revised it so, well, if we have I don't know we have and, but again it's very hard to tell where that'll

come out.

J : Do you intend to revise those forecasts in the March statement?

T: No.

J : ... given a few of the forecasts are at least under

serious question and the Governor of the Reserve Bank has also revised his own forecasts publicly last week, that they'd like to know -T: In which respect?

J : Well he said that GDP growth was likely to be closer to zero than two -T: Yes.

J : I mean, don't you think people would like to know what the Government's revised view of the economy is given the events in the last, few -T: Well they may do, but we do them once a year and we don't

do them every time the debate springs up about them. GDP could well be down, could well be down from that

forecast.

J: By how much?

T: May well be down even, but I'm not really able to say at the moment. You know, wait until we get the next set of national accounts.

J : You don't think there's a role for the March 12 statement to give some sort of statement of what the Government's perceptions are?

T: Well there may be, there may well be. It'll just depend on how we figure it when we put it together.

J : But do you say your contribution to the economic

statement will mainly be the tax changes which would help export industry?

T: Up to this point the statement was an industry statement and I've been working to that from late last year. Now it'll have more breadth than that, whether it will encompass a set of revised forecasts is a different, you know, a horse of a different colour altogether.

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J : ... economic statement. Is that how you see it, that

it's a major economic statement?

T: Well I think it's, I mean, most things that Governments do are economic. It'll be a statement about directions with a preponderance, a preponderance of industry policy issues. That's what I'd -J : ... forecasts are revised in this statement?

T: Well it's right and at this stage it would probably be bordering on the unlikely that we'd revise the forecast.

J: Mr Keating, how's the wool crisis affecting the balance of payments and can the Government really sustain the reserve floor price scheme?

T: They're questions which Mr Kerin has under notice at the moment. It's something which he's considering and the Cabinet will be considering before so there's not very much point in me speculating about that.

J ; ... rural sector ...

T: Well obviously it would help a great deal if rural

incomes were higher and if we were getting better prices for our rural produce, but again, I think much of this financial year has already passed and it's going to be a year where rural incomes will have declined fairly

sharply and that'll have an impact on national income and wealth and expenditure and demand within the economy.

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J: The Governor of the RBA is predicting an inflation rate of 5 per cent in the middle of the year and market estimates are even lower at the moment, does this mean that there is room for a further easing of monetary policy in the near future?

T: Well I think expectations about inflationary outcomes in the shorter term and inflationary expectations are two different things, inflationary expectations matter a great deal. Short term expectations of what the March quarter CPI are going to produce amount to

nothing more .... than speculation. So let's wait and see what happens and let's wait and see what impact they have on inflationary expectations. I mean I think inflationary expectations have changed and have come

back and that's best manifested in the 10 year bond rate, beyond any of what the rest of us might say, it is best reflected where people vote, and that is

through bond prices, with a 10 year bond rate. And inflationary expectations matter a great deal and managing inflationary expectations down is a critical part of economic policy. And the deflation we have

seen coming from policy is obviously making those inflationary expectations better, that is they have declined further. But for me to make a judgement now about future declines in inflation and then factoring those into nominal interest rates is I think, you know,

a bit of wishful thinking.

J : The CPI of the December quarter actually bears out in these lower expectations and can we then expect an evening of monetary policy?

T: Not necessarily no, because a lower December quarter CPI obviously means a lower inflationary performance, a lower inflationary performance for the year we hope to December, but that's got to ongoing for inflationary expectations to be affected, to be seriously and beneficially affected and it is that which has the capacity to have impacts on the nominal interest rate

structure. Now we've already made an adjustment to interest rates, the last one much of the last one per cent was a judgement about the real and perceived shift in inflationary expectations so basically we still maintain the real rate of interest which was around but cut the nominal rate on the basis of that shift of

inflationary expectations. But that was a genuine shift, a big shift in the 10 year bond rate, a big shift in community psychology, a big shift in business psycology, it wasn't just one quarter's release, it wasn't just one quarter's number.

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J: inaudible.

T: No, well I'm not about maintaining real rates, but I am about being real. We're financing a current account deficit, with a relatively high accumulation of national debt, we're out there in the world savings pool bidding for resources and if you get two scatty

about what real rates you ought to be paying you could end up the worse for wear.

J : How damaging to the inflationary expectations is the perception in the community that monetary policy was not handled correctly last year that it was actually held on for too long, which is a comment you see

floating around the newspapers now and did monetary policy actually, was it actually set right last year?

T: Well I took interest rates off one year ago, over a year ago, in early January, and the Governor and I discussed that in late 1989 and thought that was about right. Now at the time many commentators said the Government is reducing these rates politically. Remember the debate we had, was this a political

reduction in interest rates, was this engineered because of an election. And we said no we thought that demand had slowed and while it was not as perceptible in the current account as some people would have likely before we shifted the rates, we nevertheless shifted

them on our own judgement. That's a long time ago, I mean we've had a years past, rates are down 6 percentage points since then, and what you are seeing I think in some of the more abrassive episodes in the

economy, in terms of some sectors, is the impact of bank and bank lending policies on those sectors, quitting a very large double of inflationary expectations and asset prices and the concomedent correction of banks books and the provisioning for

losses and the policies they have employed in the process. Now without, if you like without that we probably would not have seen those negative quarters and you wouldn’t have the word, the technical recession word floating about.

J : You talked about the impact of that reversal of bank practices in Victoria and the Victorian economy and some of the other factors affecting Victorian activity, do you think given the straits that the Victorian economy has been in, there should be a storeroom for

some sort of assistance to be provided for the Victorian economy by the Federal Government?

T: Well that's a matter for judgement, Victoria, the morale in the Victorian community and its economy is down and that is a matter of national concern, it is a matter of concern to me, and but whether we do anything

specific about it will be a matter for judgement.

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J : Is it something you could include in the March 12 statement for example?

T: Well, not necessarily but there is no doubt a lot of the high rollers were funded out of Victoria, the Goldbergs, the Skases, the Herscus and the knock-on effects have been largest in Victoria, this is not true

of New South Wales, it is not true of Queensland and Victoria is basically, the performance of the Victorian economy is I think basically the cause why we saw these negatives growths in GDP, why we have the word

recession in our newspapers.

J : (inaudible)

T: Well that implies we are assisting them you see.

J: Well that's left the question open.

T: Well exactly.

J: I'm just asking how you'd go about that.

T: Well because it's open it doesn't mean to say we're going to do it. You know, we'll think about it, I mean for a start there is the offer we made the States at the Special Premiers' Conference on housing in 1990, which leaves open the option of some Premiers

approaching us if they wish on housing related matters, there's one area for a start.

J: Is this the infrastructure matter you were talking to Mrs Kirner about before Christmas, or is that separate again.

T: Part of it was that.

J : Mr Keating, what is your latest estimate of the surplus and what effect is the fall in the surplus actually going to have on the program of ... in Government debt?

T: Well if there is a lower surplus, there will be less redemptions, probably, there may be less redemption, but I couldn't give you a really accurate number about the surplus right now, I can get, it is possible for me to have one, but I haven't got one in my head.

J : (inaudible) last week somewhere around $4 billion?

T: Well that was again a guesstimate on his part.

J : Guesstimates....

T: Yes but I hold all the revenue information.

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J: (inaudible)

T: Generally no. Well it’s the Finance Department, they don't need it I mean simple as that.

J : With your better knowledge of the situation do you endorse that?

T: Yes, the surplus will be down substantially, but I've said that myself, it's as a matter of trying to quantify it and he's not entirely easy to quantify at this stage.

J: Do you think Mr Willis, .... briefing giving....

T: Well no, was trying to oblige one of your number by his best estimate and that's fine, but again once has to factor in that trends in PAYE receipts not actual receipts but trends in receipts, because the year is not over it is only half over.

J: Does this imply you are a bit more optimistic Treasurer?

T: No, no it just implies I don't give out numbers that I'm not sure about.

J : ... seemed to send a fairly message powerful to the rest of the Cabinet and the Caucus that there is not a lot of money to be throwing around?

T: Well that's a message that Mr Willis and I repeat often.

J : (inaudible).

T : I don't know.

J : Mr Keating, we've been through the worst of the recession, do you think activity will continue to fall?

T: Well I think we will see activity improve certainly in this calendar year, whether we see it before the end of the financial year, I don't know, I would hope so, so we're probably seeing the thing, where they are moving

towards the bottom of that trough or in it, it's very hard to tell.

J : How pessimistic about the impact of external events in the Australian economy?

T: Not terribly pessimistic about it, I think that Japan is still growing strongly, so is Germany, the US has been at a position of a substantial decline in activity, the enhanced spending and what have you on the Gulf War might kick along demand a little in the United States. I mean it needs to be borne in mind

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that there is an impression of foot that the recession we have in Australia is ours alone and no-one else has one, I mean the British recession is far more severe

than ours and so is the US, I mean property deflation in some parts of the east coast of the United States and the west coast are far greater than Australia, far greater and banks are far more vulnerable there than

any of our banks are here, they are not as prudentially sound, in general and in Britain, Britain's in a recession and it has inflation rising not declining and it's facing wage settlements of 17 per cent with a tight exchange rate.

J: So Mr Keating are you saying that the US recession is actually worse than ours?

T: I think the impact of it, the impact of it is, I mean it wouldn't surprise me if there was four quarters of negative growth in the United States.

J : Would it surprise you here if there were four quarters of negative growth?

T: Well I was just talking about the earth for the moment, in relation to the US. I think that what is happening there is reasonably for them, quite severe and in their property sectors, exceptionally severe.

J: Your assessment of the Australian economy wasn't based originally on such a severe recession in the US was it? There must be some .. for us?

T: Yes, it does, it does. But the US does not, what happens to the US economy does not have the impact on the global economy that it had in the early 1980s for instance. And in this circumstance where you've got Japan and Germany both doing rather well, and France and other countries, I mean that we are not quite going to see the sort of impact we saw in the early 1980s.

J: You therefore totally reject the theory that John Hewson was putting forward the other day about the roll on recession?

T: Well I think John Hewson is now falling into the trap of most opposition leaders, he is gloomy on every occasion about every matter and in the end non-believeable. So I think you would do well to

record some of his gloom and perhaps play it back to him six months hence.

J: Why is it do you think that it's the English speaking economies that have gone into recession, other European economies, and Asian economies haven’t?

T: Well it's hard to say, in Japan's case there was a big, a decision to turn around domestic demand and move away from net exports, it was a strategy of pulling their

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current account surplus down and dealing with the imbalance in trade of the United States by turning away from net exports to higher levels of domestic demand so that is something powering them along. In Germany's case, the strength of German investment over the last few years, plus reunification is probably the main

issue pulling them along, as is the case with France who is sort of caught up in the common market with them. In Britain's case, Britain's case is that there was no trend improvement to productivity, there was one

off improvements in productivity, it's died, inflation is rising, interest rates, there was a boom in activity fuelled by tax cuts and a stiff monetary policy which has pulled it back into a recession and part of that was of course the fashion for lending and the common

cultures of the English speaking financial system which operated in United States, Australia, Canada and Britain all of whom are in a recession.

J: (inaudible)

T: No not really no. Only that as I said I take these Parliaments, Parliament by Parliament you know.

J: (inaudible)

T: No more definite than I've been in any of the last I've been in.

J: Can you tell us when you expect to announce the new Secretary of the Treasury?

T: In the next week or so I suppose.

J: Can I ask one more question about the balance of payments .. 90 per cent of the of the six month figure you mentioned is the net income deficit and although as you've pointed out many a time Australia now has a

large degree of overseas investment of its own, we seem to be getting only half the rate of return on those investment that foreign investors are getting on their investors in Australia, can you enlighten us as to why we are getting such a lousy return and whether you see

any prospect of that net income deficit declining?

T: Well I don't think the returns are lousy it's just that the returns have been ploughed back into other investments, that is dividends have been reinvested in enterprises abroad and part of the reason why we were not getting a flow of dividends back to Australia was because of the foreign tax credit system and we had to

run a foreign tax credit system when we had our corporate rate at a great disparity with the corporate rates of the northern hemisphere and we had a 49 per

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cent corporate rate and they had 36 and 38, we used to bring them back and top them up on distributions as to 10 or 11 per cent, so they didn't distribute, some did if they felt that their earnings needed that fillip in

the stock market, they distributed but others put their funds back into their enterprises abroad, one of the reasons, on of the principal reasons we cut the corporate rate to 39 per cent was to remove the need

for a credit system, because if you've got the US at 38 and Britain 36 there is not much point in making great large companies account for their tax payable for a credit or a top up of 1 or 2 percentage points, so that's when we went to foreign source income and we said we'll white list you and if you're a white listed country, if you're not, you're in the other list, and

if you are white-listed you don't need to comply with a foreign tax credit system. This has removed one of the great inhibitions of bringing dividends back to Australia, so over time particularly from super funds, which are revolving funds, that block of investments

offshore should over time produce a counterveiling income stream to the one we are losing our interest on. And that's why the Government's had a two-pronged strategy for all this, it has been putting a clamp on the generation of the debt at source by cutting the current account deficit and then developing a couterveiling stock of assets offshore from which we

may then earn an income stream in the 1990s.

J: That's only happened a couple of years ago and there's been no sign of it....

T: Not really, I mean it happened, yes, it's just happening, I mean it takes a while for companies to change the way in which they operate and some will still be growing, I mean we're in a growth phase, some will still be putting investments back into those

companies, they won't be bringing them home, but given the fact that dividend imputation has produced such a tension between the rights of shareholders and the rights of managers where no such tension ever existed

in the past, managers treated shareholders with the contempt they thought they deserved, that the rights of shareholders under dividend imputation are now such that managers feel compelled to produce either franked dividends or strong dividends and it means

international companies feel obliged to bring dividends back home where in the past they would have simply reinvested them as a capital accruing stock, but now stocks are capital gains taxed, they tend to distribute so there is all these things working in favour of a stronger dividend stream in the 1990s.

ENDS